What is lease accounting?

Lease accounting or accounting for leases is an accounting-related procedure which involves recording all transactions and keeping numbers relevant for on-going both operating and financial lease agreements.

Lease accounting consists of many rules and regulations, mostly outlined by lease accounting standards, such as IFRS 16, ASC 842, AASB 16, for example. With the aforementioned accounting standards in power, companies must know keep more accurate books on their operating as well as financial leases. All lease liabilities, for example, longer than 12 months, should now be transferred and reflected in the balance sheet.

This type of accounting is a highly-demanding portion of the job which means that companies need to have experienced personnel as well as capable software to deal with the challenges. Otherwise, crunching down numbers would be an almost endless task for any person, handling lease accounting. SOFT4Lessee is just the right tool for lease accounting!

What is an operating lease in accounting?

Operating lease is a form of financing various purchases.

Generally, a lease is an agreement between two parties (lessee and the lessor) in which the two parties exchange the rights for using asset(s) for goods or services (usually money). The main difference between a purchase and a lease is that the lessee gets right to use but not ownership rights, at least until the final payment is done.

In accounting, operating leases are just another procedure and operation which needs to be recorded in a specific way, according to the current regulations. Newest accounting standard regulations now require businesses to record their operating leases and associated liabilities on the balance sheet. There are exceptions, additional requirements and conditional factors, all very important for proper operating lease accounting.

What are some of the various lease options in accounting?

In general, leases are divided into two groups – operating and capital (or financing) leases. Let’s go over them one by one, as there is confusion out there as to how the two are different.

Financing lease is a type of transaction when there is a purchase option at a lower price (called bargain option). Determined at the initial stages, before signing the contract, a possibility to outright purchase an asset at a lower value. It’s also labelled as financing or capital lease if the term of the lease takes up 75% or more of the expected lifespan of the asset or, also, if the NPV of total minimum lease payments adds up to 90% fair value of the asset.

Operating leases transfers 0% risks and 0% rewards from one party to the other. In general, if it doesn’t meet the criteria of finance lease, it’s considered an operating lease.

How lease accounting changes affect the balance sheet?

Before the newest accounting standards came into effect, operating leases and related liabilities were to be excluded from the balance sheet. This could, in the long-run, distort the accuracy and perception of the financial health of the company. Now, both capital (finance) and operating leases are to be included in the balance sheet in order to eliminate the risk of potential manipulation of the books.

The most common changes to other important financial documents are:

Interest expenses related to the operating lease are to be added to the income statement
Increase of present liabilities for the present value of operating lease future obligations
Operating lease expense on income statements to be removed
Depreciation expenses, linked to leased property, to be added to income statement

Just to name a few.

What is IFRS 16?

IFRS 16 software is a tool, tailored around the need for straightforward and simple lease accounting within the boundaries of compliance for IFRS 16. Tools like SOFT4Lessee have a wide array of tools, features and modules which help speed up, simplify and improve the quality of lease-related bookkeeping.

A lot of businesses still lean on outdated and poorly performing Excel-based calculators. They are far less efficient, much slower and have almost zero scalability to be convenient once your organization starts growing. Dedicated IFRS 16 software has integrated modules and formulas, ready to be used at your earliest convenience. Simplify day-to-day tasks like invoicing, greatly reduce the time it takes to crunch numbers and generate reports as well as charts almost instantly. In short, professional IFRS 16 software is an accounting tool, used to simplify accounting and bookkeeping for leases.

IFRS 16 leases definition?

IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019, with earlier application permitted (as long as IFRS 15 is also applied).

The objective of IFRS 16 is to report information that (a) faithfully represents lease transactions and (b) provides a basis for users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. To meet that objective, a lessee should recognize assets and liabilities arising from a lease.

IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments.

When is IFRS 16 becoming effective?

The effective date of IFRS 16 lease accounting standard was the 1st of January, 2019. Moreover, private companies have been given a year longer to become compliant whilst public companies had to get prepared before the aforementioned deadline.

All companies with effective lease agreements or those, who were planning to launch a lease portfolio in the near future are affected by this standard, coming into effect. If you want to know more about how SOFT4Lessee can help your business stay compliant within these new rules right now, don’t hesitate to request a live demo or a trial version of the software. You can familiarize your accounting staff with the ins and outs of this new accounting standard and how dedicated software can help you overcome the challenges that lie ahead.

Are IFRS 16 right of use assets tangible or intangible?

IFRS 16 does not specify that a right-of-use asset is in the scope of either IAS 16 or IAS 38. Instead, it appears that a right-of-use asset is a new category of asset in the scope of IFRS 16 itself.

This could have important consequences for assessing some of the impacts of the new standard. Companies won’t have the full picture until other accounting and regulatory bodies have responded. For example, the new accounting could prompt changes in the tax treatment of leases. A key question for the financial sector is how the prudential regulators will treat the new assets and liabilities for regulatory capital purposes.

What is AASB 16?

AASB16 accounting standard – the IASB published AASB 16 Leases in January 2016 with an effective date of 1 January 2019. The new standard requires lessees to recognize nearly all leases on the balance sheet which will reflect their right to use an asset for a period of time and the associated liability for payments.

AASB 16 leases definition?

AASB 16 leases – a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

AASB 16 leases effective date?

These changes were issued by the Australian Accounting Standards Board in February 2016 and are effective for periods beginning on or after 1 January 2019 i.e. 30 June 2020 year-ends for many Australian entities. Australian Accounting Standards (AASBs) are equivalent to International Financial Reporting Standards (IFRSs). Throughout this document where it refers to an IFRS or an International Accounting Standard (IAS), the equivalent AASB standard is applicable.

Does AASB 16 improve decision making?

To assess the overall impact that the introduction of AASB 16 has had on investor decision making, we asked investors how the standard had impacted their investment decision making thus far. Contrasting views were expressed by investors as to the significance of the impact of the standard on investor decision making – ranging from absolutely no impact at all on investor decision making to a significant impact on all investors. For example, one investor noted that ‘AASB 16 has affected pretty much everyone in quite a material way’, and another investor noted that it is probably ‘the most significant accounting change in terms of its impact on all areas of the financial statements and the investment community.’.

AASB 117 vs. AASB 16?

The AASB 117 for lessees classifies leases as either operating or financial leases when the new AASB 16 removes the off-balance-sheet in AASB 117 leases classification and treating all leases as financial leases. However, the exemption applies to less than 12-month leases (short term) and leases of low-value assets (BDO Australia, 2016). The key objectives of the project were to recognize all leases as right-of-use assets to put all leases on the balance sheet, capitalizing all leases. Furthermore, to make future lease payments, a company needs to represent its obligations when recognizing its financial liability as lease payments are made over time (IFRS, 2016).

No substantial changes were made to the lessors as the current AASB 117 lessor model has been carried forward to AASB 16 but enhancing the disclosure process (BDO Australia,2016). The treatment of the residual value guarantees is the main difference between the current and the new standards. Also, the leveraged lease model was removed in AASB 16when the previous standard AAB117 permitted the netting of non-resources debt. Lessor is required to disclose additional information in AASB 16 compared to the AASB 117 on risk management related activities (such as residual interest in assets, subject to leases). Additionally, other limited changes were made to align the lessor and lessee accounting model to adopt the same definitions (IFRS, 2016).

Does AASB 16 provide a more faithful representation?

It depends on the calculations that are being used. Which ones have been approved by the Big4 and which are not. The one we are using is approved by the Big4 and is a correct representation of the standard.

How AASB 16 impact profit?

Operating leases are no longer expensed through profit or loss, and instead are recorded on the balance sheet, resulting in further scrutiny of leases to obtain assets and determining what assets should be bought or leased. The operating lease expense is replaced by a depreciation expense on the right of use asset and an interest expense on the lease liability.

What does AASB 16 do?

AASB 16 (sometimes IFRS 16 is also mentioned together, they are pretty much the same) is a lease accounting standard. It is quite new and came into effect on the very first day of 2019. The AASB 16 was drafted and created a while ago, but only became a mandatory requirement recently. The main difference between previous standards and this new one is the fact that AASB 16 requires for the accountants to transfer operating leases onto the balance sheet. This requirement is instated to make sure that the financial documents of a company would more genuinely reflect its financial well-being.

In the past, businesses were able to manipulate lease numbers which led to major bankruptcies and financial scandals at the start of the 21st century (most notably – Enron). Over time, various fiscal governing bodies, all over the world, drafted new accounting standards that would prevent such mishaps in the future. So, AASB 16 does regulate lease accounting.

What is ASC 842?

ASC 842 is a lease accounting standard. It was implemented in order to make lease disclosures and company books more accurate and better reflect overall financial health. Accounting teams, expecting to be compliant in this day and age, have to do work according to the ASC 842 standard nowadays. Public and private companies were required to adopt this new standard by 2021 and 2022 respectively.

Both the lessee and the lessor now have to arrange their accounting processes in a way to be compliant with the new rules. It requires listing some lease-related assets as liabilities, for example. This might not seem a huge change from the outside, but in the world of lease accounting, this had a major impact. The ASC 842 lease accounting standard allows accounting teams to devise a more accurate picture of the overall financial health of businesses with leases.

What is lease accounting (ASC 842)?

Accounting, also known as bookkeeping is a business process when employees, software (or both) record financial transactions of a business, categorize them and prepare detailed analysis, summaries as well as reports to interested parties (e.g. CFO, CEO, tax inspectorate, etc.). In general, accountants are employees of a company or service providers who know the most up-to-date information about the financial health and stability of any organization.

Lease accounting is just bookkeeping in relation to leases (a lease is a contract where right-of-use is exchanged for something, usually money). Lease accounting has its own rules, which can be labelled as accounting standards. ASC 842 is just that – the most recent and up-to-date accounting standard for leases. If a business wants to avoid trouble with the IRS or its counterparts in their respective countries, they have to follow the rules and regulations of this accounting standard.

ASC 842 leases definition?

ASC 842 leases prevent companies from hiding financial obligations that are basically liabilities. ASC 842 requires leases to be classified as finance leases if they meet any of the following five criteria: The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.

Has ASC 842 been delayed and what is the effective date of ASC 842?

Yes, ASC 842 has been delayed to 2022. One-year deferral of the effective date for public not-for-profit entities that have not yet issued GAAP compliant financial statements to fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years.

What is Soft4Lessee system?

SOFT4Lessee is a highly integrated, flexible, “all-in-one” business solution for lease accounting under IFRS 16/ AASB 16 standard and US GAAP (ASC 842).

Can you integrate Soft4Lessee with another ERP software?

Yes, Soft4Lessee can easily be integrated with other ERP systems such as NetSuite, Infor, Dynamics AX, 365 business central, 365 business central for business and operations (Axapta), Oracle, SAGE, etc.

How do we decide what type of services (pricing model) will fit the needs of our business most?

Soft4Lessee is available both on-premises and in the cloud, used with a purchased-in-advance license, subscription-based or SaaS. If you choose the subscription model, you pay a monthly fee for the Soft4Lessee licenses. You can use either Windows client or Web client independently of whether you choose Soft4Lessee software as an on-premises or cloud-based solution. While a SaaS option may work ideally for businesses who have hundreds or few thousands of leasing agreements, those with more than 10,000 agreement leases or have complex lease agreements (e.g., variable leases, leases in foreign currency), should consider Soft4Lessee purchase of the license model with powerful customization possibilities.

Is there a minimum number of users for the software?

If you choose the SaaS option, the minimum amount of users is 1. For on-premises version, starter pack is 3 users.

Does Soft4Lessee handle both lessee and lessor aspects of the standard?

Yes. The Soft4Lessee accounting software provides support for both lessee and lessor lease types.

How long does it take to get set up?

Once you’ve decided that Soft4Lessee is right for you, we can usually get you up and running within 48 hours.

Does the solution provide an upload function for lease information from spreadsheet for the initial transition?

Yes, it is a standard feature of Soft4Lessee product.

What is the frequency of releases of new versions?

1-2 releases per year, 3-6 months after Microsoft releases a new version of the platform the solution is built on – Microsoft Dynamics NAV/ Dyn365.

Does the product support Single sign-on functionality?

Yes, it does.

Does Soft4Lessee handle Multi-currency functionality?

Yes. For Leases denominated in a foreign currency, the system will re-measure lease liabilities using closing currency exchange rates at the end of each reporting period, as required by the IAS 21 standard. The exchange rate difference is recognised as a gain or loss, not affecting the Right-of-Use asset value.

What kind of training is provided?

Soft4Lessee is a part of the Microsoft product family with Microsoft Office look and feel so that you can get up and running quickly and easily. You can also use access to helpful demos and get support from our team.